The semi-annual Financial Stability Report from the Reserve Bank of India signals that the country’s banking system, especially the public banking system, has put behind it the stress from disturbingly high non-performing or bad loans on its books.
The story, as officially told, is now familiar. As a result of “aggressive lending practices” and “wilful default/loan frauds/corruption in some cases”, stressed assets in the banking system rose sharply along with a rise in aggregate gross advances of public sector banks, from Rs.16,98,570 crore at the end of March 2008 to Rs.45,90,570 crore at the end of March 2014.
Since this is routinely stated in answers to questions in Parliament, the choice of end date—just ahead of the installation of the first Narendra Modi government—does seem convenient. But it is also justified because the RBI’s decision to mandate an asset quality review to address massive underreporting of non-performing assets (NPAs) was taken in 2015.
That year, the RBI took cognisance of the fact that through restructuring agreements that were neoliberal by design, NPAs had been reclassified as restructured assets and thus temporarily concealed from public view.
The asset quality review resulted in an increase in the volume of recorded gross NPAs of public sector banks from Rs.2,16,739 crore on March 31, 2014 to Rs.8,45,475 crore on March 31, 2018, a rise from 4.72 per cent of gross advances to 15.52 per cent of gross advances, according to figures in the answer to Rajya Sabha starred question No. 355 on April 5, 2022. But the picture has changed considerably since. Remarkably, the RBI now reports that as on September 30, 2022, the gross NPA ratio of public sector banks had declined to just 6.5 per cent, bringing the figure within striking range of its 2014 value.
The Financial Stability Report of a year earlier, released by the RBI in December 2021, had projected in its baseline scenario that the gross NPAs ratio of all scheduled commercial banks could increase to 8.1 per cent by September 2022. Even the public banks that carried much of the NPA burden have now brought it down to a far lower figure.
That is quite an achievement, given the COVID-19 pandemic’s impact on banking performance and amid the debt payment moratoriums and special credit lines announced by the government in response to the pandemic in 2020. That the turnaround could be managed in such an environment establishes the fact that the assessment that the government would not be able to save the banks on its own, and would require large-scale mobilisation of capital from the markets, especially through disinvestment or privatisation, was unfounded.
Addressing bad debt
The strategy of addressing the bad debt problem had many components. Recognition had to be followed by provisioning to cover for the losses expected. According to an answer to Rajya Sabha question No. 1,507 dated December 20, 2022, public sector banks had made provisions totalling Rs.21,48,906 crore over the five-year period ending March 31, 2022.
This not only resulted in losses for the banks but ate into the capital of the banks, which had to be reconstituted to ensure that the specified minimum capital adequacy ratio was maintained and solvency ensured. One way this was done was through direct recapitalisation by the government by subscribing to bank equity from its own fund, or funds mobilised by issuing recapitalisation bonds to the banks themselves.
According to the answer to the question cited earlier, the government had infused Rs.2,86,043 crore into public sector banks over the five year period ending March 2022. That equals around 13 per cent of the provisions made by the banks over those years and 34 per cent, or a third, of their NPAs as on March 31, 2018. This helped, but clearly it was not just recapitalisation that has retrieved the banks from the mess they seemed to be in during 2018.
Direct mobilisation of capital by banks played an even smaller role, with capital mobilised by the public sector banks over the four financial years ending March 2019 placed at just Rs.65,800 crore. And very little of this was through the sale of equity to private parties. As of March 31, 2022, ownership of the RBI and the government in 12 public sector banks varied from 57 per cent to 98 per cent and the combined holding of the government, the RBI, and resident financial institutions from 76 to 99 per cent. Privatisation has not moved forward and Indian banks are still overwhelmingly state-owned institutions.
This is not surprising because, while there was persistent talk of the need to privatise public banks to mobilise resources for recapitalisation following NPA reduction, it was clear that private investors would have little interest in buying into banks burdened with debt. A number of other initiatives played a role in NPA reduction. Given the uneven distribution of NPAs across banks and the particularly bad balance sheet position of some of them, the consolidation of weak with strong banks was a measure that was adopted. Vijaya Bank and Dena Bank were amalgamated with Bank of Baroda in April 2019; Oriental Bank of Commerce and United Bank of India with Punjab National Bank; Andhra Bank and Corporation Bank with Union Bank of India; Syndicate Bank with Canara Bank; and Allahabad Bank with Indian Bank, with effect from April 2020.
Moreover, public banks were mandated to write off bad debt after provisioning for them. NPAs that had been fully provisioned for were written off after four years of being identified. According to the RBI, over the five financial years ending March 2022, scheduled commercial banks, especially public sector banks, wrote off bad debt totalling Rs.10,09,511 crore.
In principle, borrowers remain liable for repayment of “technically” written-off loans and the process of recovery of dues from borrowers is supposed to continue. However, little has actually been recovered in practice. Recovery proceedings through a host of channels—suits in civil courts or in debt recovery tribunals, action under the SARFAESI Act, cases “resolved” under the Insolvency and Bankruptcy Code, sale of non-performing assets through Asset Reconstruction Companies, and resolution through negotiated settlement or compromise—have not yielded much. Of the more than Rs.10 lakh crore of debt written off over the five years ending March 2022, commercial banks have succeeded in recovering only Rs.1,32,036 crore, or around 13 per cent, during that period.
Clearly, suffering the pain of providing for bad loans and writing them off with limited recovery was the principal means through which public sector banks have managed to bounce back, reporting significant profits in recent quarters.
In sum, despite statements by RBI officials, government spokespersons, and “experts” from NITI Aayog and other think tanks, that privatisation was the means to resolve the bad debt problem, public sector banks have addressed the issue without handing over significant blocks of shares to private players. And this they did with limited direct support from the government.
It is no doubt true that in this process of resolution, big business players have been the beneficiaries, getting away lightly, having taken on and not repaid huge debts and, barring those identified as wilful defaulters, not even being named individually for the malfeasance. But the banks managed to clean up their balance sheets, revive credit growth, and improve profitability.
Call for divestment
What is intriguing is that the call for disinvestment and privatisation continues. The Finance Minister’s Budget speech for the 2021-22 declared that the government intends to privatise two public sector banks. A paper by two ostensibly independent experts, one of whom has served as Vice Chairperson of NITI Aayog, calling for privatisation of all public sector banks, excepting State Bank of India, is receiving much attention in policy circles.
While bank privatisation could not be carried out using NPAs as an excuse, the demand for it seems to intensify as the books of banks get cleaned up. This is worrying. Public banks that were not attractive targets for private acquisition when they had large NPAs on their books, have turned attractive now with comfortable balance sheets, rising profits, and large volumes of safe government bonds on their books.
It cannot be doubted that the NPAs carried by public banks had to be cleaned out. But the call for privatisation gathering momentum again suggests that the government’s push to complete the resolution process in record time possibly had a different motivation: That of cleaning the bank books to pave the way to implement a central objective of its neoliberal agenda—the reversal of bank nationalisation.
C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts, Amherst, US.
- NPAs had been reclassified as restructured assets and temporarily concealed from public view.
- Gross NPA ratio of public sector banks have been brought down to just 6.5 per cent.
- To address bad debts, public sector banks made provisions of Rs.21,48,906 crore over five years ending March 31, 2022.
- As of March 31, 2022, ownership of the RBI and the government in 12 public sector banks varied from 57 per cent to 98 per cent.
- Private investors showed little interest in buying into banks burdened with debt.